Tuesday, December 30, 2008

The Peerless Prognosticator of Palm Beach

We have been asked in recent days why we don't join the chorus of investment advisors, CNBC pundits and just plain wise guys offering stock market/investment predictions for the New Year.

Our standard response has been similar to what James Thurber wrote in his introduction to “My Life and Hard Times” (look it up, kids), to the effect that he always carried the uneasy feeling that whatever he was writing had already been done better and more quickly by Robert Benchley (look him up, too).

Robert Benchley was a famous humorist, sort of the Will Farrell of his day—only literate and actually funny. And, in our book, the Robert Benchley of stock market prognostications has to be my old pal, Doug Kass, the so-called “Bear of Boca.”

Doug, who runs money, writes on the stock market and somehow managed to find time to appear on CNBC in years past whenever the hosts needed to find a lonely bear on housing, also publishes a list of predictions every year.

So with Kass on the case, who needs another batch from us?

Sure enough, Sunday night it hit our email: Doug’s fearless predictions for 2009. So fearless, in fact, that the number of predictions runs to twenty in all.

And these are not your Bryon Wien-variety, “The dollar will strengthen and then weaken”-type stuff.Wien, who pioneered the annual Wall Street prediction phenomenon, tends towards the kind of on-the-one-hand-on-the-other statements employed by Wall Street strategists such as he used to be. Doug, however, minces no words. Whereas last year, for example, Wien (who to his credit accurately predicted recession and credit tightening) foresaw consumer spending being “lackluster” in 2008, Doug predicted a “retailing depression,” quote/unquote.

And Doug’s predictions for 2009 are, as usual, a mix of straightforwardly logical calls quite at variance with the emotional consensus (on housing, for example), along with some out-of-left-field notions, including musings on Madoff that are of such specificity that you wonder what, exactly, Doug has been hearing at temple.Now, we will not attempt to repeat, refine, or review any of the 2009 predictions. You should read them yourself, as Doug wrote them:

But before you do, we want take issue with one aspect of Doug's new list.

Candor and lack of word-mincing aside, what also distinguishes Doug from other Wall Street “seers” is that Doug always prefaces his new predictions with a no-holds-barred look back at his prior lists. Read carefully from this year's look-back:Our surprise list for 2008 proved to be our most successful ever, with 60% of last year's "possible improbables" proving to be materially on target. Almost half of the prior year's predicted surprises actually came to pass, up from one-third in 2006 and from 20% in 2005. Nearly of one-half 2004's prognostications proved prescient and about one-third in the first year of our surprises for 2003.

What we want to take issue with is Doug’s note that 60% of the picks from his 2008 list were “materially on target.”

The fact is the 60% that Doug got right, in our view, were so out-there at the time he wrote about them, and turned out to be so dead-on-accurate in the way they unfolded—record market volatility, hedge fund outflow acceleration, job losses, “an unprecedented and abrupt drop in personal consumption expenditures,” not to mention Fed policy, Goldman Sachs miscues, private equity “at a standstill,” the value of the dollar falling and the price of oil breaking above $135—that to say Doug was “materially on target” is like saying Tiger Woods won a golf game last summer before his knee gave out.

If anybody came closer than Doug Kass to getting the guts of the 2008 financial crisis—and much of its ramifications—right, ahead of time, we’d like to know.

Indeed, so variant (to use one of his favorite terms), so out-there, so accurate and so timely were Doug’s 2008 predictions that we here at NotMakingThisUp herewith re-title the so-called “Bear of Boca” with something more appropriate than that one-dimensional sobriquet.

Since Doug’s Florida office is in Palm Beach these days, we’re going for the “Peerless Prognosticator of Palm Beach.”

And while we’re at it, we’ll mention something else. One other unfinished piece of business lurks here.

We think it only right that every guest on CNBC—the money managers and the so-called strategists who smirked, sneered, laughed, snorted, and talked over Doug during his Larry Kudlow appearances for the two or three years that the housing bubble was percolating into a worldwide economic crisis which not one of those prattering princes of positivism got right—ought to say on the air and into the camera, the next time Kudlow has them on, for whatever reason he might want them on, what Abraham Lincoln once wrote to General Ulysses S. Grant after that general's bloody march on Richmond:“You were right and I was wrong.”

It won’t happen, of course. But that doesn’t mean it shouldn’t.

So, our hat is off to Doug Kass: The Peerless Prognosticator of Palm Beach.

The content contained in this blog represents the opinions of Mr. Matthews.Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

20 comments:

Kass Fan
said...

Doug handled himself like a consummate gentleman - cool/calm/collected -- on Kudlow's show during the rose-colored-glasses Dow 15000 days when the other guests ridiculed his bearishness. I was always impressed by his demeanor when the other guests (ostriches?) smugly attacked his ideas. Of course, Doug ended up being right, and he's got the scars and the dough to prove it. Way to go Dougie!

Kass made some good macro calls, but went on record (on "thestreet.com") with a lot of lousy trading calls, as he turned bullish again way too early, at one point recommending Citi in the $20s: http://www.thestreet.com/story/10398712/1/kass-buy-citigroup-for-a-rainy-day.html

Anyone following Doug's advice here (and a number of other times that he tried to short-term-time the market) would've wound up giving up a huge chunk of anything made earlier on the short side.

I appreciate his comments, though I agree with some more than others. I'm anticipating a rally to S&P 1100, but I doubt it will last. I suspect he's also right that the new administration will create a significant housing credit that could help to stabilize the residential housing market. Though I suspect they'll have to make the housing credit permanent or phase it out over 20 years to keep housing propped up after 2009. One year won't be anywhere near enough. As for the CRE market rebounding shortly, that's a highly improbable improbable. If we get a rally from here, I'll gladly take the other side of that trade.

I listen closely to Kass, he's a very smart guy and I agree with some of his 2009 predictions, albeit far less than the 2008 ones. But reading through his 2009 list it seems like he's one of these people who are delerious about Obama and believe him to be The One. I guess it's just interesting to see someone who was bearish for so long think we're going to have an incredibly (unrealistically?) quick recovery.

The most interesting part when reading Doug Kass' 20 Predictions For 2009 was when he describes the purpose of his predictions:

"The real purpose of this endeavor is to consider positioning a portion of my portfolio in accordance with outlier events, with the potential for large payoffs." (bold & italics mine)

I find it interesting that Mr Kass is thinking probablilistically, by "betting" on long shot events that potentially have positive financial outcomes should those long shot events come to fruition (i.e., betting on "black swans" according to Nasim Taleb).

I think it's a great way to think about how to invest in stocks, too (i.e., betting on stocks that are down 50%+ with the possibility of a comeback based on an unanticipated earnings surprise or two). But I could be wrong, though...

Oh, here we go. " Possible improbables". If it happens, well I said it was possible. If it doesn't, I did say it was improbable. Another version of the good old fashioned double speak. He'll be right either way. So Kass was allegedly a hot hand in '08. My instincts say to do the opposite the next year of whatever the former hot hand recommends. Yes, I said former hot hand because thats usually the way things work out.

I think on my own blog last January I accurately predicted the outcome of the election and pressure on state budgets (both rather obvious events). But was not actually trying to make predictions per se.

Doug Kass has bee very good, but I think Denninger has been the most accurate (if a bit too hyperbolic) of the web commenters I read.

An aside - Kudlow gets a lot of criticism for his boosterism and rose-colored glasses, but it is from his show that I first heard Doug Kass, Peter Schiff, and many other bears over the last few years. He has done a great service to viewers who watch with an appropriate level of skepticism by providing a platform for people with viewpoints different than his.

MattJ: I agree on Kudlow, and deliberately excluded Larry from the critique.

I've been on the show myself, and although Larry may disagree with your conclusions, he'll always ask why you think the way you do rather than criticize what you think just because it's different from his own conclusions.

(I recall fondly watching Larry interview Socialist Senator Bernie Saunders of Vermont during the TARP bailout debate last fall. Saunders gave Larry enormous grief over Larry's support for the bailout. Larry took it in stride, and let Saunders have his say. It was great television.)

The talking heads who owe Doug an apology are the perma-bullish guests--the strategists and economists--who tried to make Doug's life miserable when he appeared on the show while the Bubble was in full swing.

Not for nothing, those same permabulls probably made their investors' lives miserable, too, given their complete lack of intellectual honesty and inability to listen to guys like Doug Kass.

And yet the year of 2009 will be the year to prove Kass wrong on most of his predictions. Neither Obama, nor anyone else, including Mr. Printing Press, would be able to reverse the downward death spiral movement. The only thing that might are sustained efforts to rebuild the now almost completely outsourced US production capacity. As it concerns the US, which has turned out of the largest creditor nation into the largest debtor nation, all debt based solutions are non solutions at all.

Once the Obama rally fades away, the markets will set new lows, which won't be the lows. Eventually, when the bottom is reached, the market will trade at those levels similar to the Nasdaq trading after the dot.com collapse in 2000.

In addition to the comments re Mish and ITulip, both of whom have been excellent, Nouriel Roubini at rgemonitor.com laid out the more-or-less precise course of this crisis a year ago and has been banging the drums for a long time.

Both Doug Kass and ITulip have had some bad calls. Roubini and Mish have been amazing.

"If anybody came closer than Doug Kass to getting the guts of the 2008 financial crisis—and much of its ramifications—right, ahead of time, we’d like to know."

Prem Watsa (Fairfax Financial)and John Paulson (Paulson & Co.) were not only dead-on about the crisis and its ramifications, but made absurd quantities of money by investing according to the way they saw things playing out.

Question. If in 2008 he made 60% of the calls right he also made 40% of calls wrong. Which calls were wrong? Comment. On the financial crisis, Doug Kass has not been the most accurate, as the blog reports. Has this guy ever heard of Meredith Whitney and Nouriel Roubini?